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I say things on Twitter

7/16/08

Why junior miners?

"So what's the obsession with juniors, Otto? Dontcha like Petrobras, or America Movil, or Cemex, or (fill in with own preference)?"

That one gets thrown at me occasionally, and though it comes up more often when the sector hits a slump (like right now) I do understand it's a valid question. So as I got asked (a variation on) it today, here are a few lines to try and answer, hopefully without falling into the mental masturbation trap.

Firstly, commodities are what South America "does well". The world wants 'em and this region has 'em. Thus following on from that, mining is the sector I'm most asked to cover. For every enquiry that passes this desk about a supermarket chain, 25 come for miners.

As for the producing miners, there aren't that many big producers in the region (surprising?). My client base is English-speaking, live on the other side of the Equator and wants stocks that trade in the USA, Canada or London (and in that order, too). Once you've covered bases with PCU, BVN, SQM, RIO, ANTO.L and a few others, the other large mining companies tend to be world players with operations here (NEM, FCX, BHP etc). There are exceptions of course (e.g. AUY, HOC.L, and I can add a few more on this list), but the vast majority of single target plays are juniors or explorers. And although I follow Peru quoted stocks closely (e.g. Volcan*), there's little call for coverage when the companies don't quote up there. It's the way it is.

But the main reason is the value offered by juniors. As a fundamental analyst by trade, the junior mining sector is home to eye-poppingly cheap stocks. The risk is high (and often very high), and also smaller companies get kicked around by political meanderings more easily (just ask ARU holders). But when the ducks line up right, and a company has great numbers, excellent prospects (usually derived from the quality of management involved) and lies low on the world investor radar, the combo offers me the most benefit from my tiny little niche in the world.

The mix is: number-crunching ability in a sector I understand (though I don't pretend to be a geologist, metallurgist etc by any means) living in the region, speaking the language, easy access to site visits, picking local brains, having a handle on the LatAm way of life, politics and all that jazz. From that, seeing which juniors are untouchable, which might have problems down the line, which are good corporate citizens and which are the outstanding companies gets that much easier. And when you sift through the whole region and find a jewel of a company that sits under 99% of people's radars, any short term sell-off is very easy to ride. I don't just pick 'em out of a hat, ya knowz...

So the bottom line here is that I truly believe there are dozens of companies down here that are currently trading at fractions to their true values. I've mentioned some of them here on the blog already. I don't apologize for heavily featuring juniors on this blog. I'm not wildly flag-wavingly proud about it, either. It's just the way it is. This blog started as and continues to be an extension of my normal daily working life. My work is 70% juniors, and aside from the political stuff so is this blog (I think). Pretty simple, in the end.

*though the good news is that the company is considering a London listing now